HMC Capital Limited (HMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the HMC Capital Limited FY '26 Full Year Results Briefing. I'd now like to hand the conference over to Mr. David Di Pilla, Group Managing Director and Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining today's call. With me on the call this morning are Group CFO, Will McMicking; and Group COO, Victoria Hardie. I'll start the presentation on Slide 5. Financial year '26 was a year of disciplined execution against our key strategic priorities, leaving the business well positioned for growth in financial year '27. Firstly, we delivered financial results in line with our guidance. Second, we made substantial progress on the strategic initiatives we outlined to simplify, scale and strengthen the business. Over the last 12 months, we've sharpened our focus on the areas where we have the greatest competitive advantages and the strongest growth opportunities, improving both the quality of earnings and the scalability of the platform. Third, we've materially strengthened the balance sheet through capital recycling. HMC today has considerable balance sheet liquidity to accelerate organic growth across all our verticals. And finally, we're entering financial year '27 with significant dry powder and fundraising momentum. We see multiple pathways to grow our fee-generating AUM and recurring earnings across each of our verticals. I'd now like to turn to the result itself on Slide 6. Operating EPS finished at $0.404 for the year, in line with our guidance. Fee-generating assets under management increased to $16.9 billion, up 15% on financial year '25. This is predominantly underpinned by growth in institutional capital partnerships during the period. Recurring funds management revenue increased to $165.5 million, up 22% on financial year '25, demonstrating strong growth in high-quality recurring income, which we expect to accelerate in financial year 2027. We also finished the year with a strengthened balance sheet. We now have liquidity and investment capacity with tangible assets and undrawn debt capacity of approximately $1.9 billion. And finally, the Board has declared a final dividend of $0.06 per share for the period, bringing the full year dividend to $0.12 per share. Turning now to Slide 7, our strategy. This is the strategy we outlined in May, and I'm not going to spend a lot of time walking through it today because it remains unchanged and continues to underpin the way we're building HMC Capital. At its core, our purpose is simple: to create value in quality real assets through operational expertise, particularly where we see opportunities that are overlooked, underutilized or can benefit from active management. The key message is that this strategy provides a repeatable framework for value creation by building scalable platforms, which deliver high-quality recurring funds management earnings. Moving now to Slide 8 and progress on our strategic objectives. Starting with Simplify. During the period, we completed the windup of HMCCP and commenced the scale back of our U.S. digital operations, which is now reported as a discontinued operation. These actions have delivered run rate cost savings and released approximately $150 million of capital to the balance sheet from HMCCP. On scale, in private credit, we secured $1.35 billion of new institutional mandates, providing substantial dry powder to grow fee-generating AUM. In real estate, we continue to grow our unlisted institutional AUM, supported by strong demand for retail development opportunities. In energy, we completed the $603 million institutional partnership with KKR. This validates the quality of the platform and provides capital to fund future developments. In digital, we've taken important steps to recycle capital out of lower returning U.S. assets and into high-yielding opportunities within the Australian platform. And finally, on strengthen. The steps taken this year have strengthened the balance sheet as we end the year with increased liquidity and support future growth. Importantly, we have over $5 billion of AUM growth opportunities across the platform and are ready to scale our verticals further. We're building a business driven by recurring management fees supported by long-duration institutional capital and multiple growth platforms. Turning now to Slide 9, which highlights the significant progress we've made in building HMC Capital into a scaled alternative asset manager over the last 5 years. Since 2021, fee-generating AUM has grown from just over $2 billion to $17 billion, representing a compound growth rate of approximately 52% per annum. Over the same period, funds management revenue has increased at around 60% per annum. Importantly, the majority of that growth has been generated organically. What's often overlooked is that 3 of our 4 verticals being digital, private credit and energy were only established over the last few years. A considerable portion of our effort during the past 18 months has been focused on institutionalizing and operationalizing these platforms, investing in people, systems, governance and origination capability to create a scalable foundation. Today, we are seeing the benefits of that investment. Each platform is now well positioned to attract capital and grow its recurring earnings through '27 and beyond. 60% of our AUM is now held in perpetual vehicles, creating long-duration capital that underpins our earnings. Moving now to Slide 10, our balance sheet. Over the last 3 years, we've used our balance sheet to seed and scale new platforms. We've executed over $3 billion of strategic acquisitions to establish our digital, private credit and energy verticals and in so doing, increased fee-generating AUM by $8.8 billion and added more than $100 million per annum of funds management revenue. Minimal goodwill was paid to create these recurring earnings streams. Today, following the capital recycling achieved through the energy partnership and the wind up of HMCCP, our balance sheet is back to $500 million of undrawn debt capacity and $1.4 billion of investments. We're now focused on driving higher returns from these balance sheet investments across our co-investments, our listed positions and our Illuma Energy platform. We've identified a number of opportunities to recycle our capital into higher returning investments over the medium term. Now let's put this into context. The chart on this slide highlights this transition and demonstrates that by optimizing our balance sheet investments of approximately $1.4 billion, we believe we could generate an additional $25 million to $50 million per annum of underlying earnings over time. As we think about it today, there are multiple pathways to achieve this. And as part of that, we expect the weighting towards principal investments to increase from around 35% to 50% as we recycle our balance sheet capital positions. Now moving to Slide 11, which highlights why we have so much momentum coming into '27 with over $5 billion of growth opportunities across our verticals. In real estate, we have around $2 billion of dry powder through our unlisted funds, HARP, HUG, LML and our listed HDN. In digital, DigiCo is progressing 67 megawatts of new capacity across SYD1 and ADL1, representing $1.2 billion of near-term capital growth. HMC is also progressing a further 1 gigawatt of greenfield opportunities across digital infrastructure, leveraging our digital and energy expertise. In private credit, following the establishment of 2 institutional mandates in recent months, we now have over $1 billion of investment capacity across our mandates and pooled funds. While the current dislocation in the residential real estate market is creating challenges for some managers, we believe it will create opportunities to deliver increased fund returns for our investors without materially increasing risk. We believe our platform is now market-leading in terms of risk and asset management, independent valuations and governance. And in energy, we have committed equity for our first BESS project with around 2 gigawatts of further developments moving towards FID over the next couple of years. As you can see, each vertical has a clear pathway to grow, and we are well positioned to execute across all of them. With that, I'll now hand over to Victoria to take us through the detail.

Thanks, David, and good morning. Starting with our real estate vertical on Slide 13. This remains our largest and most established platform, contributing almost $90 million in management and transaction fee revenue in FY '26. Our unlisted real estate AUM grew 15% in FY '26 to $2.9 billion, underpinned by strong deployments across our retail property strategies. David already touched on our $2 billion of growth opportunities in this vertical, providing a clear path to further scale the platform. A key differentiator for HMC's real estate platform is that we are not simply allocators of capital. We actively manage and develop assets to create value for our investors. This is evidenced by the performance track record of our existing unlisted funds, which have generated a 12% weighted average IRR since inception. We also continue to assess selective asset sales and capital recycling opportunities across the listed platform to support a reduction in gearing, enhance balance sheet flexibility and take advantage of value-accretive acquisitions. On HCW, the dividend guidance has been reinstated at $0.06 per share in FY '27, subject to the Healthscope situation being resolved, which we expect in the coming weeks. And importantly, 100% of Healthscope rent has been paid up to and including August 2026. Turning to private credit on Slide 14. Our private credit business grew 17% in FY '26 to $2.3 billion, driven by strong inflows from wholesale investors into both our pooled and direct funds, and that's before the $1.35 billion of institutional mandates we recently announced. The financial result for FY '26 for private credit was impacted by reduced loan origination volumes in the second half, reflecting a more disciplined approach to deployment in response to evolving market conditions. We have, however, seen a strong start to loan origination volumes this year. The business continues to focus on middle market CRE loans of $20 million to $250 million, primarily senior secured lending in the residential and industrial segments across the Sydney, Melbourne, Brisbane and Gold Coast metro markets. We have a pipeline of over $4 billion of deals under evaluation to support deployment in FY '27 and are continuing to strengthen our origination capability, expanding into the New South Wales market, increasing our average loan sizes and deepening our repeat borrower relationships. The quality of the book underpins continued growth in our private credit business. Portfolio construction is deliberately diversified with the largest single exposure, approximately 3% of the book. Institutional-grade risk management and governance and the significant investment we've made in the platform positions us to keep growing with discipline. Slide 15 demonstrates why this is now an institutional-grade platform. You can see the transformation between 2024 and 2026. Committed AUM has grown from $1.5 billion to $3.3 billion, and the proportion held in pooled funds and mandates has increased from 49% to 85%. We've also introduced institutional mandates, a majority independent trustee Board, quarterly independent valuations and dynamic AASB 9 provisioning, none of which were in place 2 years ago. Supporting this is a market-leading team of more than 70 specialists, most drawn from senior banking backgrounds. Our key leaders in credit, property risk and lending bring an institutional approach developed over long careers at the major banks. Our property risk team is, in our view, best in market with in-house valuers, construction managers and quantity surveyors that most managers simply don't have. We also provision for credit losses like a bank does with EY conducting quarterly independent reviews of provisioning and carrying values. The track record of our flagship core fund speaks for itself, returning 8.7% over the last 12 months and with 0 principal losses since inception. This is now a scalable institutional-grade platform with the capability to attract and retain global capital. And you can see the proof of that on Slide 16, with $1.35 billion of new institutional mandates from global investors as previously announced in June. These mandates will take our AUM to $3.3 billion once deployed, representing growth of 120% over the past 2 years. These mandates include a strategic partnership with TPG Credit, one of the largest and most experienced credit investors globally. The partnership was established following TPG's rigorous manager selection and due diligence process in Australia. And the partnership is focused on larger opportunities, having been seeded with $375 million of loans. Importantly, our origination pipeline is building to support these mandates and to seed new ones, and we expect institutional capital to represent a growing share of AUM over the medium term. Turning to Digital Infrastructure on Slide 17. DGT delivered a strong FY '26 result with underlying EBITDA of $127 million, ahead of the $125 million guidance and generating $35 million of management fee revenue for HMC. Simon Mitchell and Ralph Goninan were last week appointed as Co-Heads of DGT with both having played critical roles leading the development and execution of DGT's refreshed strategy. Alongside this, Damian Secen has been appointed as HMC's Managing Director, Infrastructure, covering both our digital and energy verticals. The DGT strategy update announced in May is now largely progressed with the sale of CHI1 and LAX1/2 well advanced. In addition, we have recently reached agreement with our tenant at Dallas and Kansas to extend the lease terms to 2036. We are now focusing on Australia, where DGT has operational and development capabilities with a team of over 100 people. The expansion of our marquee SYD1 asset is well underway. The first 20-megawatt deployment has been completed on time and budget. DGT has executed LOIs for the remaining 52 megawatts of capacity with high-quality customers, and the expansion has been accelerated with a targeted delivery over FY '27 and '28. The sale of U.S. assets will increase DGT's liquidity to around $1.2 billion, which fully funds the highly accretive SYD1 expansion. DGT is also progressing the ADL1 15-megawatt brownfield expansion, underpinned by advanced customer discussions. Together, these developments support a pathway to a stabilized Australian platform EBITDA of $250 million for DGT once the SYD1 and ADL1 expansions reach stabilized occupancy and billing. The digital platform continues to benefit from powerful megatrends with AI, cloud migration and data growth driving sustained demand for high-quality power-backed infrastructure and supporting future growth in digital AUM. In Australia, the ability to originate, develop and operate power-enabled sites responsibly with a clear focus on community engagement and social license is becoming a key differentiator. HMC is assessing a pipeline of over 1 gigawatt of greenfield opportunities where we can bring together development expertise, operational capability and energy market insights from across the group. Turning now to energy on Slide 18. Through Illuma Energy, we've now established a scaled integrated renewables and storage platform, a top 10 platform in the National Electricity Market with $1.5 billion of AUM across wind, solar and battery storage. Importantly, we've transitioned energy from balance sheet seeding to institutional capital with a development pipeline and multiple pathways to realize value over time. The platform has 652 megawatts of operating capacity, of which 85% is contracted and a substantial development pipeline of around 5 gigawatts across 19 projects. Within that, we have roughly 2 gigawatts of near-term projects progressing towards final investment decision, including the Moorabool, Molong, Bawurra and Kentbruck projects. The introduction of institutional capital gives us a capital-light growth pathway while preserving HMC's exposure to platform value creation. Through our institutional partnership, Illuma has secured a $248 million capital commitment to fund up to 90% of the equity component of the platform's first BESS project. And HMC's invested capital has reduced to around $200 million while retaining the majority of future upside. And there are multiple pathways to realize value in the platform, including the introduction of additional third-party capital into the platform by syndication or to fund further growth and a clear AUM pathway of $3 billion plus from near-term projects. Slide 19 sets out Illuma's near-term development projects. We are actively progressing these projects across batteries and wind with each advancing well through land approvals, grid connection and offtake. And importantly, we expect these projects to deliver 20% plus target returns on our invested capital. Finally, on sustainability on Slide 20, which remains core to how we operate. As the group has expanded, we're aligning our sustainability framework with our broader platform. During the year, we reviewed our priorities to reflect the new Illuma Energy and digital verticals, and this is informing the evolution of our strategy and targets with a further update expected later this year. We made solid progress across all 3 pillars. From an environmental perspective, our Illuma Energy partnership is supporting the decarbonization of the NEM and 2 of our real estate developments achieved 4-star Green Star certifications. We continue to focus on social and community impact with the HMC Capital Foundation making grants to 9 organizations, including 6 scholarships supporting First Nations and regional students. Gender diversity improved to 67% female representation for our independent Board Director positions across the group. And we maintained our MSCI ESG rating of A. It's an ongoing priority, and we remain committed to pursuing growth that supports positive long-term impact for all stakeholders. I will now hand to Will McMicking to discuss our financial results.

Thanks, Victoria. And turning now to the earnings summary on Slide 22. For FY '26, HMC delivered operating earnings before tax of $166.8 million or $0.404 per share, which was in line with guidance. Adjusted for the discontinued operations of StratCap USA, the group recorded funds management EBITDA of $88.5 million and operating earnings increased to $0.437 per share. Management fee revenue increased 23% to $159.3 million, driven by fee-earning AUM growth in real estate and a full year contribution from digital. Transaction and performance revenue reduced to $41.2 million, reflecting the absence of larger transaction revenue that was recorded in FY '25. Employee expenses were stable year-on-year, while corporate expenses increased modestly as we continued to invest in platform capability. Distribution income declined, reflecting no distributions received from HCW for the period, while investments comprised an unrealized fair value gain from the energy platform of $146 million, partly offset by a fair value loss in the Capital Partners Fund of $55 million. Interest expenses increased to $22.8 million due to senior debt drawn to warehouse energy transition assets. And a final dividend of $0.06 per share has been declared, bringing total FY '26 dividends to $0.12. Turning to the balance sheet on Slide 23. Net tangible assets at 30 June were $1.2 billion or $2.95 per share. Following the completion of the energy sell-down, HMC's investment in the platform has moved to an equity accounted investment, while the HMC Capital Partners in-specie return has transitioned to a direct investment held at fair value following the wind up of the fund. Gearing was 10.7% as at June '26, which decreased compared to December '25 with the completion of the energy transaction. Moving to capital management on Slide 24. Drawn debt of $219.5 million is substantially lower than December '25, leaving more than $500 million in cash and undrawn debt, which when combined with $1.4 billion of tangible balance sheet assets, positions HMC well into FY '27. I'll now hand it to David.

Thanks, Will. And now turning to the outlook for financial year '27. We move into financial year '27 with real momentum, a strong balance sheet and a platform with dry powder for earnings growth. We're guiding to financial year '27 underlying earnings of at least $0.35 per share, and that's a 16% year-on-year growth. However, if we exclude the energy transition fee capital charge of $35 million earned in financial year '26, this represents 60% growth year-on-year. That step-up is underpinned by 3 drivers: one, more than 30% in recurring funds management revenue driven by our digital and private credit platforms; two, a 35% increase in co-investment distributions from DGT, HCW and HDN; and finally, fixed cost leverage as we expect to grow our recurring revenues faster than the cost base. Importantly, this guidance excludes any upside from capital recycling on our balance sheet, large transactions and one-off gains in investment income on existing principal investments. We also expect 100% conversion of underlying earnings guidance to cash in financial year '27 as noncash arrangements for management fees cease. On the dividend, we're guiding to $0.15 per share, up 25% on financial year '26 supported by the growth in recurring earnings and consistent with our strategy of largely reinvesting retained earnings in accretive growth opportunities. I'd like to thank everyone for joining, and I'll now hand the call back to the operator for Q&A.

Your first question today comes from Solomon Zhang from UBS.

Just interested in your feedback just on your private credit funds, particularly just on the pooled side, and we're seeing a redemption request lift. What have you sort of assumed in your '27 guidance around the trajectory of that component, noting that you've obviously got strong inflows coming through from the insto side and deployment of that mandate?

As I said earlier, our credit standards across the group are in really good shape. We have a really good team on the ground, dealing with most of our pooled fund wholesale investors. We stay close to them. We communicate regularly. We've seen a small amount of redemption activity in the last few months. But when we offset that against inflows, it's quite negligible.

Great. So you're still seeing net inflows, I take it from your clients?

There were inflows this month. And so they largely offset the outflows.

Great. And maybe just a question for Will. So taking a look at Page 30 of the earnings by division. Just on the energy transition line, it doesn't seem like there's any EBITDA coming through any debt costs from the platform. Just wanted to confirm, are those excluded from your measure of underlying earnings?

Yes. So the gain of $146 million there, that was net of the platform operating cash flows and financing. So we ended up booking a fair value gain on the assets of about $200 million after transaction costs. So we effectively valued the platform AV of $1.2 billion.

Great. And just in terms of contribution into '27, just on the operating side, post interest expense. Could you just give us a little bit of a steer there?

Yes. I mean we're really trying to focus the attention on underlying earnings, which is the funds management EBITDA cash distributions and then any realized gains from principal investments. So we'll probably just leave it at that. As Vic sort of touched on, the platform is delivering well, but that's very much a long-term investment. So it will be realized in the future, and that's when it will go into earnings.

The next question comes from Simon Chan from Morgan Stanley.

David, you spent a bit of time talking about optimizing returns this morning from balance sheet investment. And I think you threw out the number out there, $25 million to $50 million on a per annum basis from optimizing returns. Can you just give me some insights into what you mean there? Is it simply putting stuff, putting your money into higher-yielding investments, yielding 9% rather than 6% and hence, you get the $25 million to $50 million a year? Or is it more, hey, we're going to get the transaction machine going and we're going to do deals that will generate $25 million to $50 million a year of transaction profits?

So you've asked 2 questions in one, and I'll break that up into 2 questions, Simon. So you're very insightful in terms of the comment. It's the former. So it's basically generating a better return on our capital. So yes, you're correct, recycling from lower-yielding investments into higher-yielding returns. So that's where we -- the comment around the $25 million to $50 million of increased earnings comes from. So it's really just recycling into higher-yielding returns. And then in terms of the guidance, I was very clear and explicit. The guidance does not include any transaction fees.

Great. That's very clear. I just got a follow-up to the previous chat's question to Will about energy. Will, so am I reading you right to say to conclude that energy is unlikely to develop -- sorry, to generate any EBITDA contribution in FY '26 FY '27?

No, that's not correct. I guess what we're saying is all our equity investments, we include cash distributions in our underlying earnings. I mean that's a long-term investment. It's planning to invest, not declare dividends. So as and when those investments are realized in the future, that's when it will go into earnings, but that's profitable.

Right. So is it possible that if the Moorabool battery, the decision gets made over the next 12 months over the course of FY '27, for example, if you decide to sell the project, sell the land, that could contribute to HMC group profit?

Yes. I mean the definition is if we're realizing net cash gains, then we'll book it into underlying profits.

Excellent. And just my final question. I think in Victoria's comments, you talked about slowdown in private credit in the second half. Can you just give me some insights into what happened there? Is it just you guys hitting the brakes? Or was it a slowdown in the general market conditions?

It was a disciplined decision and a deliberate one to slow down on the lending side just to -- in response to the evolving market conditions that we were seeing following the interest rate hikes and the budget. So it was a risk management strategy. But as I said in my remarks, we have seen an uptick in origination volumes in this -- the beginning of FY '27.

What's average LVR across the platform now?

I think we would say that we quote within the pooled fund. So that's probably the best way to look at it where we've got the bulk of our exposures. The way the pooled fund works is it has a maximum -- it has an average target of 70%. But that's what we aspire to or that's what we aim for, no more than 70%. But it's running today in the mid-60s on average. It's actually 58 actually on average. So it's lower than that actual. So today, below 60%, but the average that the pooled fund targets is 70%.

Your next question comes from Ben Brayshaw from Barrenjoey.

Could I just clarify, and I think I know the answer because you discussed it a couple of occasions, but does guidance include any allowance for unrealized fair value gains on investment assets?

You're correct. Ben, it doesn't.

We were very clear, no. The guidance is based on cash recurring earnings.

Great. And can you just talk about the situation with StratCap? I mean how do you see that, I guess, evolving? Is the objective there to undertake a sale of the business? Or is it more a case of pursuing an orderly wind down?

Look, I think we -- based on the evaluation we've undertaken, we think the most cost-effective way for us as a group is just to go down the path of a more orderly wind down. And you'll see that reflected in the numbers. So we think that probably will be a bit of cost associated with that wind down in '27, and it will be largely gone in '28. And what we'll keep in the U.S. is just a small representative office there going forward to keep some optionality.

Your next question comes from Richard Jones from JPMorgan.

Just trying to clarify just in your underlying earnings, I think you clear your unrealized gains and losses are stripped out. Just in Slide 30, the $13.6 million loss in corporate. Is that StratCap predominantly?

No, that was balance sheet investments in ASX equities. Balance sheet investments.

Yes. Land lease, okay. And then what's the net interest on unrealized principal investments?

Yes. So the majority of the interest -- so keep in mind, we had net cash at June last year. The main investment that we undertook during the year was energy transition. So yes, assume all the interest was attributable to debt drawn to warehouse that asset and hold that $200 million investment today.

Okay. And then just can you just...

Richard, before you move on, that was obviously going through the numbers in '26. That won't be there in '27. So that's, again, another big factor in terms of why you're seeing such a big uplift in earnings.